How to Decide Between a Roth IRA and Traditional IRA

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By keepingitsimple
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Decide Between a Roth IRA and Traditional IRA

Both a Roth IRA and a Traditional IRA provide tax benefits and are a vehicle for retirement saving. Which one should you invest in? Read on to find out.

Difficulty: Moderately Easy

Instructions

Step 1

Consider your income. A Roth IRA is only an option if you are single making up to $114,000 annually or married making a combined maximum of $166,000 annually. A Traditional IRA has no income limitations.
Step 2

Decide if you need the tax write-off now. If you do, consider the Traditional IRA. Contributions to a Traditional IRA are tax-deductible while contributions to a Roth IRA are not. For example, if you made $50,0000 last year and made a $2000 contribution to your Traditional IRA your taxable income would be $48,000.
Step 3

Do your research. Talk to a financial advisor if you need help determining the best investment path for you. It's well worth it to discuss questions and options with a professional in order to make an informed decision.

Tips & Warnings

A Roth IRA allows you to invest your money tax free. That means you don't pay taxes on your investments even when you withdraw your money in retirement.
A Traditional IRA allows you to invest your money tax-deferred. That means you pay taxes on your investments later, when you withdraw your money in retirement (most likely at a lower tax rate) AND allows you to use your yearly contributions as a tax write-off.